Lernkartei FENG2016CMEEXAMOLDTUD2013till2016 (Seite 9 von 12)

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Assume General Electric (GE) has about 10.3 billion shares outstanding and the
stock price is $37.10. Also assume the P/E ratio is about 18.3. Calculate the
market capitalization for GE. (Approximately)

A. $679 billion
B. $188 billion
C. $382 billion
D. None of the above

Answer: C: $382 billion
market capitalization = (10.3)(37.10) = $382.13 billion

Deluxe Company expects to pay a dividend of $2 per share at the end of year-1,
$3 per share at the end of year-2 and then be sold for $32 per share. If the
required rate on the stock is 15%, what is the current value of the stock?

A. $28.20
B. $32.17
C. $32.00
D. None of the given answers

Answer A: $28.20
P0 = (2/1.15) + [(3 + 32)/(1.15^2)] = $28.20

R&D Technology Corporation has just paid a dividend of $0.50 per share. The
dividends are expected to grow at 24% per year for the next two years and at
8% per year thereafter. If the required rate of return in the stock is 16% (APR –
Annual Percentage Rate), calculate the current value of the stock.
A. $1.11
B. $7.71
C. $8.82
D. None of the above

Answer: C: $8.82
Po = [(0.5 * 1.24)/1.16] + [(0.5 * 1.24^2)/(1.16^2)] +
[(0.5 * 1.24^2 * 1.08)/((1.16^2 * (0.16 - 0.08))]
0.54+0.57+7.71= $8.82

Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year,
the real rate of interest is 2%, calculate the cash flow for the year-2.
A. $60,000
B. $55,422
C. $66,150
D. None of the above

Answer: C: $66,150
Nominal cash flow = (60,000)(1.05)^2 = 66,150

For project A in year-2, inventories increase by $12,000 and accounts payable
by $2,000. Calculate the increase or decrease in net working capital for year-2.
A. Decreases by $14,000
B. Increases by $14,000
C. Decreases by $10,000
D. Increases by $10,000

Answer: D: Increases by $10,000
Working capital = 12,000 - 2000 = + 10,000

The IRR is defined as

The discount rate that makes the NPV equal to zero

The difference between the cost of capital and the present value of the cash flows

The discount rate used in the NPV method

The discount rate used in the discounted payback period method

When a firm has the opportunity to add a project that will utilize excess factory
capacity (that is currently not being used), which costs should be used to
determine if the added project should be undertaken?

Opportunity Costs

Sunk Costs

Incremental Costs

None of the above

How do you call a major market fail?

Sinni

Sini

Siinni

Sinii

Sanna

Standard error measures:

Nominal annual rate of return on a portfolio

Risk of a portfolio

Reliability of an estimate

Real annual rate of return on a portfolio

If the average annual rate of return for common stocks is 11.7%, and for
treasury bills it is 4.0%, what is the market risk premium?
A. 15.7%
B. 4.1%
C. 7.7%
D. None of the above

Answer C: Average risk premium: 11.7 - 4.0 = 7.7%

The unique risk is also called the:

Unsystematic risk

Diversifiable risk

Firm specific risk

All of the above

If the standard deviation of returns of the market is 20% and the beta of
a well-diversified portfolio is 1.5, calculate the standard deviation of
the portfolio:
A. 30%
B. 20%
C. 10%
D. none of the above

Answer A:
Standard deviation of the portfolio = (1.5) * (20) = 30%

Florida Company (FC) and Minnesota Company (MC) are both service
companies. Their historical return for the past three years are: FC: - 5%, 15%,
20%; MC: 8%, 8%, 20%.
Calculate the covariance between the returns of FC and MC.
A. 60
B. 80
C. 40
D. None of the above

Answer A:
[( -5 - 10)(8 - 12) + (15 - 10)(8 - 12) + (20 - 10)(20 - 12)]/(3 - 1) = 60
Yearly deviations of both companies. Divided by N-1.

Investments A and B both offer an expected rate of return of 12%. If the
standard deviation of A is 20% and that of B is 30%, then investors
would:
A. Prefer A to B
B. Prefer B to A
C. Prefer a portfolio of A and B
D. Cannot answer without knowing investor's risk preferences

Answer A: Same return (12%), lower risk (20% < 30%) than investment B

Which of the following countries had the highest risk premium?

Also called "spread"

Germany

Denmark

Italy

None of the above

The security market line (SML) is the graph of:

A Expected rate on investment (Y-axis) vs. variance of return

B Expected return on investment vs. standard deviation of return

C Expected rate of return on investment vs. beta

A and B

If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the
market risk premium is 8%, calculate the expected rate of return
for Amazon.com stock:
A. 15.8%
B. 14.3%
C. 35.2%
D. 23.1%

Answer D:
RAmazon = 5.5 + (2.2)(8) = 23.1%

How does an investor earn more than the return generated by the tangency
portfolio and still stay on the security market line?

Borrow at the risk free rate and invest in the tangency portfolio.

Add high risk/return assets to the portfolio

Adjust the weight of stock in the portfolio to include more high return stocks

It cannot be done.

If a stock is under priced it would plot:

Above the security market line

Below the security market line

On the security market line

On the Y-axis

Suppose a firm uses its company cost of capital to evaluate all
projects. Will it underestimate or overestimate the value of high-risk
projects ?

Underestimate

Overestimate

None of the others

Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate
of return = 12%; and Expected rate of return on the stock = 10%.
Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined

Answer B:
Required rate of return: r = 4 + (0.5) * (12 - 4) = 8%;
The expected rate of return, 10%, is more than the required rate of return, 8%.
The stock is under priced.

If a firm uses the same company cost of capital for evaluating all
projects, which of the following is likely?
I) Rejecting good low risk projects
II) Accepting poor high risk projects
III) Correctly accept projects with average risk

I only

I and II only

I, II, and III

II only

The market value of XYZ Corporation's common stock is 40 million and
the market value of the risk-free debt is 60 million. The beta of the
company's common stock is 0.8, and the expected market risk premium
is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital?
(Assume no taxes.)
A. 9.2%
B. 14%
C. 8.1%
D. None of the above

Answer A:
rE = 6 + 0.8(10) = 14%; rD = 6%; Cost of capital = (0.6)(6) + (0.4) (14) = 9.2%
27

R = rf + B ( rm - rf )

Discounted cash flow (DCF) analysis generally:
I.assumes that firms hold assets passively when it invests in a project
II.considers opportunities to expand a project if the project is successful
III.considers opportunities to abandon a project if the project is a failure

I only

II only

II and III only

I, II, and III

You are given the following data for year-1.
Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%.
Calculate the operating cash flow for the project for year-1.
A. $7
B. $10
C. $13
D. None of the above

Answer B:
(43 - 30 - 3) = 10; Tax = 10(0.3) = 3; Net Profit = 10 - 3 = 7;
Operating cash flow 7 + 3 = 10

You are given the following data for year-1:
Revenues = 100, Fixed costs = 30; Total variable costs = 50;
Depreciation = $10; Tax rate = 30%.
Calculate the after tax cash flow for the project for year-1.
A. $17
B. $7
C. $10
D. None of the above

Answer A:
EBT = (100 - 30 - 50 - 10) = 10; T = 10(0.3) = 3;
CF1 = 10 - 3 + 10 = 17

Which of the following statements most appropriately describes
"Scenario Analysis".

it looks at the project by changing one variable at a time

it provides the break-even level of sales for the project

it looks at different but consistent combination of variables

each of the above statements describes "Scenario Analysis" correctly

Financial Calculator Company proposes to invest $12 million in a new
calculator making plant. Fixed costs are $3 million a year. A financial calculator
costs $10 per unit to manufacture and can be sold for $30 per unit. If the plant
lasts for 4 years and the cost of capital is 20%, what is the accounting breakeven
level? (Approximately)(Assume no taxes.)
A. 300,000 units
B. 150,000 units
C. 381,777 units
D. None of the above

Answer A:
X = (FC + D)/(p-v) = (3,000,000 + 3,000,000)/(30 - 10) = 300,000

A corporation, potentially, has infinite life because it:

A. is a legal entity.

B. has the same ownership and management.

C. has limited liability.

D. is closely regulated.

Which of the following is an important function of financial markets?
I) providing financing; II) providing liquidity; III) reducing risk; IV) providing information

A. I only

B. I and II only

C. I, II, III, and IV

D. IV only

If the one-year discount factor is 0.90, what is the present value of $120 expected one year from today?

A. $100
B. $96
C. $108
D. $133

C. $108

PV = (120)(0.90) = 108.

If the three-year present value annuity factor is 2.673 and the two-year present value annuity factor is 1.833, what is the present value of $1 received at the end of the three years?

A. $1.19
B. $0.84
C. $0.89
D. $0.92

B. $0.84

PV = (2.673 - 1.833) × (1) = 0.84.

If a bond's volatility is 5% and its yield to maturity changes by 0.5% (points) then the price of the bond:

A. changes by 5%
B. changes by 2.5%
C. changes by 7.5%
D. will not change

B. changes by 2.5%

5 × 0.5 = 2.5%.

The dividend yield reported on finance.yahoo.com is calculated as follows:

A. (dividend/year-high stock price).

B. (dividend/year-low stock price).

C. (dividend/closing stock price).

D. (dividends/earnings).

World-Tour Co. has just now paid a dividend of $2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after paying the dividend?

A. $70
B. $56
C. $30
D. $48

C. $30

P₀ = (2.83 × 1.06)/(0.16 - 0.06) = 30.

Given the following cash flows for project Z: C0 = -1,000, C1 = 600, C2 = 720, and C3 = 2,000, calculate the discounted payback period for the project at a discount rate of 20%.

A. 1 year
B. 2 years
C. 3 years
D. >3 years

B. 2 years

1,000 = (600/1.2) + (720/1.2^2); Discounted payback = 2 years.

For the case of an electric car project, the following costs should be treated as incremental costs when deciding whether to go ahead with the project EXCEPT:

A. the consequent reduction in sales of the company's existing gasoline models (i.e., incidental effects).

B. interest payments on debt incurred to finance the project.

C. the value of tools that will be transferred to the project from the company's existing plants instead of being sold.

D. the expenditure on new plants and equipment.

Given the following data for Project M:

A. $51.70.
B. $35.54.
C. $45.21.
D. $70.00.

A. $51.70.

NPV = -200 + 150/1.05 + 120/(1.05^2) = 51.70.

Which of the following provides a correct measure of the opportunity cost of capital regardless of the timing of cash flows?

A. Arithmetic average

B. Geometric average

C. Hyperbolic mean

D. Opportunistic mean

Stock M and Stock N have had the following returns for the past three years: -12%, 10%, 32%; and 15%, 6%, 24%, respectively. Calculate the covariance between the two securities.

A. -99
B. +99
C. +250
D. -250

B. +99

E(RM) = (-12 + 10 + 32)/3 = 10%;
E(RN) = (15 + 6 + 24)/3 = 15%;
Cov(RM, RN) = [(-12 - 10)(15 - 15) + (10 - 10)(6 - 15) + (32 - 10)(24 - 15)]/(3 - 1) = 99.

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